It used to be
that we hung on every word that Alan Greenspan uttered.In the quarter just ended we shifted that attention to Hans Blix, then to
Donald Rumsfeld.It
is a sad commentary.

I
hate all of the talk of war and the action of war itself.I hate the phrase “weapons of mass destruction” which our elected
officials use endlessly, and which the Iraqis either do not have or are
refraining from using.And I am
horrified that people’s children, on both sides, must die.I do not want to discuss the subject of war in this letter or in
conversation.

But I must, at
least insofar as it relates to the markets.Because the war and it’s aftermath is what is on every investor’s and
every trader’s mind.The effects
have been felt in our equity, bond and commodity markets for months now.

For months prior
to the invasion stocks declined, continuing a trend begun more than three years
ago; oil and gold soared; and bonds were strong.With the actual commencement of hostility, everything reversed; stocks
rocketed, oil prices tumbled, gold gave back some of its gains, and bonds were
mixed at best, reflecting the rapid redeployment of money into equities.

The consensus
opinion has been that if we see a quick resolution to the Iraq situation the
stock market will almost certainly shoot up.For once, the consensus appears to be correct, as markets did not even
wait for victory, which is a virtual certainty.

The removal of
the uncertainty as to when and even if we would invade, seemed to be the fuel
propelling stocks into a powerful rally, carrying the Dow Jones index a thousand points higher in
two short weeks, even pushing, momentarily, into positive territory. We
can expect continuing dramatic swings in the market based upon the daily news.

Whether the rally
can carry is another question. What is often not
voiced is the fear that the market will slip back to pre-war levels at the
conclusion of the war.

The bear case
relies heavily upon the uncertainty of our military action and possible
terrorist retaliation;the bull case upon a quick, successful outcome.The end game will certainly depend upon domestic economic conditions
following the scuffle.

We are certain to
send many billions of our dollars abroad for the rebuilding of Afghanistan and
Iraq.Perhaps one benefit will be a
steady supply of oil at stable prices.A
cost is to be seen already in our Federal deficit, which is ballooning out of
control.

Many people are
asking me if I think interest rates are going up, and what effect will that have
on stocks and bonds.We all know
that bonds will be hurt by rising rates. But if interest rates go up, what
happens to stocks?The
answer:stocks will go down.I
must say, though, that I believe that we have entered an era that will see very
low interest rates for a long period of time.I am having trouble envisioning a scenario where the government can raise
rates.

The bigger
question to my mind is what happens to inflation?Because war is an inflationary act:we build things to explode.This
adds nothing to the economy other than the velocity of money.

I have noted
above that inflation hurts both stocks and bonds, and that rising interest rates
also hurt both markets.Can we have
high inflation and low interest rates?I
cannot recall any time in recent history when those two conditions existed
concurrently, and they would seem to be mutually exclusive. I can recall,
however, high inflation and a stagnant economy.

The markets,
though, are emotional, driven by psychological swings, and not easily subject to
rational analysis, at least in the short term.Anything can happen, and it is extremely difficult to foresee the next
turn of events,now more so than
usual.

There is an old
saying, “May you live in interesting times.”We surely do. I wonder now if
that is a blessing or a curse.

In sum, the
markets hate uncertainty, and though one uncertainty has now been lifted, many
others remain.I pray for as quick and bloodless a resolution as possible to
the situation; I hope that our sons and daughters can return home, safe, in
short order.

I believe our
portfolio is in as good a position as possible given the circumstances.I do not advise any radical changes to our holdings.